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Taxes versus Cuts

I'll be among those to admit we need more revenues to reduce the ludicrous debt of the federal government. We also need to cut spending dramatically to have any hope of balance in the future. Personally, I'd rather see the cuts first, and then we can slowly raise taxes to reduce the annual deficit followed by paying down the debt to a reasonable maintenance level.

Unrestrained government expansion comes at a price. At least John B. Judis admits as much in a recent essay on the "need" for higher taxes.

[There] are a set of unpleasant truths lurking behind this debate over the budget and taxes that policy-makers in Washington need to acknowledge. First, that in order to meet public demands for affordable health care, quality public education, and retirement insurance, government at all levels will need to grow and take up a larger percentage of the nation's GDP. Second, any significant cuts to these programs' funding will undermine their effectiveness. And third, the only way to maintain these programs is by raising taxes on income and wealth—and well beyond, the kind of increases that the Obama administration has proposed in negotiations over the fiscal cliff.

The government has grown dramatically over the last century. The federal government has gone from 2.47 percent of GDP in 1913 to 24.33 percent in 2012. Total federal, state, and local spending has gone from 8.1 percent in 1913 to 39.94 percent today. Military spending shot up during World Wars I and II, the Korean War, the Vietnam War, and Ronald Reagan's military buildup in the 1980s, but it has remained between 4 and 6 percent of GDP over the last two decades. The largest federal, state, and local expenditures – which account for more of the growth over the last century -- are for pensions, health care, and education.

These programs exist, and have grown, because the public overwhelmingly supports them. Opposition to them is largely confined to a noisy faction of Ayn Rand disciples and business groups that view public expenditures, which they describe as "entitlements," as a subtraction from private wealth.

The public "supports" these programs because most citizens are not paying for the government we have come to expect. We want the benefits — and we have no real appreciation for the costs. Right now, the costs are abstractions, debts financed with and hidden by with Treasury notes, state and local bonds, and other fiscal masks. The Federal Reserve has also helped hide the true costs of our government with quantitative easing, which has helped keep equities stable despite a fragile economy.

We need to face the truth: people are not paying into the system, but they want more, more, and more. This is not about the rich or wealthy paying a "fair share" of taxes. It is about a system that dissuades personal responsibility.

People don't appreciate that the Welfare State is out of control. Eventually, communities and individuals start to depend on the magic money from Washington to solve problems. Personal responsibility and community cohesion are lost when everyone assumes a federal entitlement program, a federal safety net, will solve all problems. A simple example is the low savings rate in this country. People assume they can live on Social Security. People would rather own big screen TVs now than save for a retirement decades in the future.

Judis correctly concludes:

The alternative to paying for the rising costs of these services is not to provide the services, or to provide a drastically inferior version of them for the vulnerable--run-down clinics without x-ray machines or doctors, schools staffed by listless teachers who are barely literate, pensions that plunge the aged into poverty. The Republicans and conservatives who talk about shrinking government don't say this would be the outcome […] but it's exactly what would happen if they get their way.

Sorry, but we cannot spend money we don't have, no matter how well-intentioned the program might be.

We could confiscate all the wealth of the richest Americans and it would not balance the budget and settle the debt. The better approach is to encourage work, innovation, and creation. The majority is more than content relying on the minority. It is an unsustainable model.

There will be disappointments in the future. Health care will be rationed. Pension funds will be insolvent. There is going to be a mess in the future because we are overspending. It is simply much easier for Congress to spend money than to deny a "benefit" to voters. The cuts are coming.

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